MEMORANDUM
TO: H. Lee Scott Jr.
President and CEO
Wal-Mart
FROM: Robert E. Litan
RE: Retail Diplomacy

You grew up in the 1950s, when Charlie Wilson, once head of General Motors and later secretary of defense, said "What's good for General Motors is good for the country." Today, you are privileged to run a company that is as important to the U.S. economy -- in terms of sales and employees -- as GM was then.

But Wal-Mart is not only one of America's largest companies, it is one of the world's largest. You've come a long way to reach this point. In founding Wal-Mart, Sam Walton proudly advertised that the company would sell goods made in the United States. Now you sell products from all over the world and have operations in almost a dozen foreign countries, including Britain, China, and Japan, with plans to expand into Hungary, India, Poland, and Russia. You have become the quintessential multinational corporation, and with an incredible $285 billion in sales last year, your revenues exceed the gross domestic product of Austria, Greece, and Switzerland. All of which raises the question: What is Wal-Mart's foreign policy?

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Conquer Foreign Markets: Like all public companies, you must continue to increase your revenues, and more important, your earnings. Otherwise, your stock price will stagnate and eventually decline -- to the detriment of the hundreds of thousands who own shares in the company. So far, most of your growth has come by adding stores in the United States, at the impressive rate of roughly 300 a year. You claim to have plenty of growth opportunities left in the United States by expanding into underserved regions and by adding stores near the ones you already have. But anti-Wal-Mart activists and tightening profit margins will probably hobble your growth at home.

Wal-Mart may be the proud creation of "red state" America, but its future is overseas. Your international operations already account for about 20 percent of overall sales, but with less than 3 percent of the global retail sales market, you have plenty of room to grow. Last year, you added 232 stores -- almost as many as were opened in the United States -- in such countries as Brazil, Britain, Canada, China, Mexico, and South Korea. Your recent tour of Europe to scout out competitors is a sign that you understand that Wal-Mart must become an even more global operation.

Advocate Free Trade: Your business hinges on saving consumers money by taking advantage of other countries' efficiencies. Consumers simply aren't willing to pay more for "made in America." Your critics conveniently ignore this fact -- and the billions of dollars that your low prices put into the pockets of lower- and middle-income Americans. Don't let the skeptics deter you from publicly touting the benefits of free trade. On your company's Web site, for example, you defend against the false charge that you buy 70 percent of your goods from China by pointing to the billions you buy from American suppliers. But you miss the chance to remind readers that cheap goods from China save them money, too. There couldn't be a better corporate spokesperson for telling Americans about the price savings they can get from free trade than Wal-Mart.

Extracting concessions from foreign governments will be critical, as well. You urgently need them to lift their restrictions on "big-box" retailers such as yourself. These barriers, often implemented through zoning laws, keep your trademark megastores out of important markets. Getting foreign countries to clear away regulatory obstacles, however, will require some hard bargaining. You therefore have a direct interest in jump-starting stalled multilateral trade talks. And you have influence on both sides of the divide. Because you are already heavily involved in several emerging markets -- including Argentina, Brazil, China, and Mexico -- you may be in a position to help persuade these governments to reach common ground with the United States and other rich countries at the Hong Kong trade summit in December. Meanwhile, tell U.S. Trade Representative Rob Portman that it's worth making concessions, such as reducing agricultural subsidies, that are a waste of U.S. taxpayers' money in any case. Opening Europe and Japan to efficient American retailers and other service providers will help consumers there, but it will also create jobs in the United States. Start making the case.

Build a Safety Net at Home: Unfortunately, support for liberal trade policies in the United States is crumbling fast. New concerns about "offshoring" have seriously eroded public support for trade. As you know, not everyone wins from freer trade: Some lose their jobs, though far fewer than popularly believed. Workers in import-competing industries may keep their jobs, but they often must accept stagnant wages, or even wage cuts. Wal-Mart can use its influence to help soften the blows of the free market -- and shore up political support for free trade.

It is long past time, for example, that the U.S. government ease workers' legitimate anxieties over job losses by strengthening the safety net. Specifically, you should urge federal lawmakers to provide "wage insurance" that, for a limited time, would replace some of the wage cuts imposed on displaced workers. Congress adopted a very narrow and complicated form of wage insurance in 2002 that was limited to workers older than 50 who could prove they lost their jobs due to trade. But workers don't care whether the source of their job loss is trade or, as is more often the case, continuing advances in technology (think voice mail and word processing replacing secretaries) or shifts in consumer tastes (car buyers who want foreign brands instead of Ford).

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